Two Ways To Play: Scared Of The 70's

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According to Bloomberg, Paul Volcker has made his most calamitous warnings regarding our financial system, claiming the central bank's recent actions jeopardize its independence.

The former Fed Chairman said that, with the recent actions dealing with Bear Stearns (BSC) debacle and its willingness to take on mortgage-backed securities, it may imply that the Fed will provide "official support for a particular sector of the market or the economy." This jeopardizes its independence which is "integral to the central responsibility" of the Fed for the purpose of monetary policy.

Volcker, who was Chairman from 1979 to 1987, said the inflation picture does have resemblances to the surging price environment of the 1970's and at risk is the confidence in the ability of the Fed. Should that happen, the U.S. could be back in the 70's or much worse. "If we lose confidence, we will be in real trouble."

Today, the Bureau of Labor Statistics reported the consumer price index rose 0.2% on a month-over-month basis and core figures increased 0.1%. Volcker said there is "a lot more inflation" than those government figures reflect.

From the Bull Pen: Bulls continue to consider plays in the consumer staples sector. Stocks like Procter & Gamble (PG), Wal-Mart (WMT), and Coca Cola (KO) all remain high on investors lists.

From the Bear Cave: Inflation will erode the purchasing power of the American consumer and at risk in this type of environment are luxury retail plays. Saks (SKS) and True Religion (TRLG) come to mind.

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